The CashFlow Challenge #3The CashFlow Challenge #3Your client, Mary Ann has $150,000
in hand. She seeks to establish a retirement account which will have a value
of $500,000, as measured in today's dollars, when she retires in 15 years.
You can invest her money to yield 7%, compounded monthly. During this time,
you anticipate that inflation will average 2.5% (nominal rate) per year,
compounded monthly.
What additional sum must this client contribute to the plan at the end of every month to attain her goal? What will be the nominal value of her account when she retires?
This is a problem involving the Inflation-Adjusted Rate (IAR).
Whenever you are attempting to reach a Future Value which is expressed in constant dollars, you must use the Inflation Adjusted Rate.
The Inflation-Adjusted Rate = ((1 + nominal rate) / (1+
inflation rate) -1) =
=
(1 + (.07/12))/(1+.(025/12)) - 1 = .0037422...
In order to use this decimal rate in the HP-12C calculator (which only accepts
values for i which are expressed as a percentage), multiply by 100.
Result: i = 0.37422..%. Enter this into the i register.
Also,
Enter 180 into n; enter -$150,000
into PV; enter $500,000 into FV.
Solve for PMT.
Answer = -$804.70 per month. The minus sign indicates
an additional investment is needed to reach the Future Value.